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CFPB Issues Final Payday Loan Regulations; OCC Rescinds Prior Guidance

Written by: Greg Johnson

Summary

The Bureau of Consumer Financial Protection (CFPB) recently issued final regulations regarding short- and long-term loans that have balloon payments (such as payday loans). Lenders will be required to reasonably determine that consumers have the ability to repay the loans.  In addition, for those loans, as well as longer-term loans with an APR greater than 36 percent that are repaid directly from the consumer’s account, lenders will be prohibited from attempting to withdraw payment from a consumer’s account after two consecutive payment attempts have failed due to insufficient funds.

What loans are subject to the new regulation?

The regulation generally applies to a lender that extends credit by making “covered loans”. A “covered loan” is generally closed- or open-end credit extended to a consumer for personal, family, or household purposes, that satisfies one of the following: (1) the maturity date for the loan is within 45 days after the loan is made (“Covered Short-Term Loans”); (2) the consumer is required to repay the entire balance in a single payment more than 45 days after the loan is made or through at least one payment that is more than twice as large as any other payment (or, with respect to multiple advance loans that are structured such that paying the required minimum may not fully amortize the balance by a specified date or time, the amount of the final payment could be more than twice the amount of other minimum payments) (“Covered Longer-Term Balloon-Payment Loans”); or (3) the cost of credit exceeds 36% and the lender is authorized to withdraw payments from the consumer’s account.

Certain types of loans are excluded, including: (i) purchase money security interest loans (credit extended for the purpose of financing a consumer’s purchase of goods when secured by the goods purchased), (ii) home mortgages, (iii) credit cards, (iv) student loans, (v) overdraft services, (vi) wage advance programs, and (vii) certain no-cost advances.

Certain alternative loans are exempt if they satisfy the following requirements: (a) not open-end credit, (b) a term of not less than 1 month and not more than 6 months, (c) the principal is not less than $200 and not more than $1,000, (d) repayable in two or more payments, all of which are equal in amount and in equal intervals, and the loan amortizes completely during the term of the loan, and (e) no charges are imposed other than the rate and application fees permissible for Federal credit unions under applicable National Credit Union Administration regulations (12 CFR 701.21(c)(7)(iii)). The lender must also satisfy certain other diligence and documentation requirements.

Loans made by lenders who, on an annual basis, do not make more than 2,500 covered loans and not more than 10% of revenue derives from covered loans, are exempt.

How does a lender reasonably determine if a consumer will have the ability to repay?

For Covered Short-Term Loans and Covered Longer-Term Balloon-Payment Loans, the lender must reasonably determine that the consumer will have the ability to repay the loan according to the terms of the loan. The lender must determine that, based on estimates of the consumer’s basic living expenses and the calculation of the consumer’s debt-to-income ratio or consumer’s residual income, the consumer can pay all major financial obligations, make all payments under the loan, and meet basic living expenses during specified time periods.

Lenders must obtain certain certifications from the consumer and conduct certain other diligence in order to satisfy verification requirements. Lenders may not make a Covered Short-Term Loans or Covered Longer-Term Balloon-Payment Loans if, during the period in which the consumer has a Covered Short-Term Loan or Covered Longer-Term Balloon-Payment Loan outstanding and for 30 days thereafter, the new loan would be the fourth loan in a sequence of such loans.

A Covered Short-Term Loan that satisfies the following requirements is not subject to this requirement: (w) the principal amount is not greater than $500 (or lesser specified amounts for additional loans of a sequence), (x) the loan amortizes completely during the term of the loan and the payment schedule provides for the lender allocating a consumer’s payments to the outstanding principal and interest and fees as they accrue only by applying a fixed periodic rate of interest to the outstanding balance of the unpaid loan principal during every scheduled repayment period for the term of the loan, (y) no vehicle security is taken for the loan, and (z) the loan is not open-end credit. The lender must also satisfy certain diligence and disclosure requirements.  A lender may not make a Covered Short-Term Loan or a Covered Longer-Term Balloon Payment Loan during the period in which a consumer has an exempt Covered-Short Term Loans outstanding and for 30 days thereafter.

What payment transfers are prohibited?

For all covered loans, a lender may not attempt to withdraw payment from a consumer’s account after two consecutive payment attempts from that account have failed due to insufficient funds. This prohibition does not apply if the lender obtains the consumer’s new and specific authorization to make further withdrawals from the account or if the lender executes a single immediate payment transfer at the consumer’s request, in each case subject to the satisfaction of certain requirements set forth in the regulation.

If the lender is also the account-holder, an account-holding institution’s transfer of funds from a consumer’s account held at the same institution is not prohibited if it satisfies the following requirements: (A) the lender, pursuant to the terms of the loan agreement or account agreement, does not charge the consumer any fee, other than a late fee under the loan agreement, in the event that the lender initiates a transfer of funds from the consumer’s account in connection with the covered loan for an amount that the account lacks sufficient funds to cover; and (B) the lender, pursuant to the terms of the loan agreement or account agreement, does not close the consumer’s account in response to a negative balance that results from a transfer of funds initiated in connection with the covered loan.

Prior to making a withdrawal from a consumer’s account for a covered loan, the lender must provide notice to the consumer in form and content as required by the regulation.

Other requirements of lenders

For each Covered Short-Term Loan and Longer-Term Balloon-Payment Loan, the lender must provide certain information to registered information systems at or prior to the time the loan is made, any updates thereto, and at the time the loan ceases to be an outstanding loan.

A lender making covered loans must develop and follow written policies that are reasonably designed to ensure compliance with this regulation and be appropriate for the size and complexity of the lender and the nature and scope of lending activities.

A lender must retain evidence of compliance with the regulation for at least 36 months after the date on which a loan ceases to be an outstanding loan.

When does the regulation become effective?

The regulation will be effective 21 months after publication of the final rule in the Federal Register.  The full version of the final regulation may be found here.

Rescission of OCC Guidance

In 2013, the Office of the Comptroller of the Currency (OCC) released “Guidance on Supervisory Concerns and Expectations Regarding Deposit Advance Products” (OCC Bulletin 2013-40). The deposit advance products at issue were the issuance of small-dollar, short-term loans or lines of credit that a national bank makes available to a customer whose deposit account reflects recurring direct deposits.  The OCC outlined its expectations for national banks with respect to these products, which included an assessment of the customer’s ability to repay, cooling off periods after a loan was paid off prior to the making of another loan, and periodic reevaluation of customer’s eligibility.  Purportedly in light of the release of the CFPB regulation, the OCC rescinded its guidance but did caution that the OCC may release guidance in the future.  The OCC’s release may be found here.

October 6, 2017 at 3:34 pm

FDIC Finalizes Limits on Qualified Financial Contracts

Written by: Angie Fletcher

On Wednesday, the FDIC finalized restrictions on qualified financial contracts (QFCs) of state-chartered non-Fed-member banks for which the FDIC is the primary federal regulator (FSIs).  The types of QFCs that are impacted by this rule include derivative transactions, repurchase agreements, reverse repurchase agreements, and securities lending and borrowing agreements. The purpose of the rule is to facilitate an orderly resolution of a failed institution by limiting the ability of the firm’s QFC counterparties to terminate contracts immediately upon the entry of the covered entity or one of its affiliates into resolution.

The rule will require FSIs and their subsidiaries to ensure that covered QFCs to which they are a party provide that any default rights and restrictions on the transfer of the QFCs are limited to the same extent as they would be under the Dodd-Frank Act and the FDI Act.  Additionally, covered FSIs would be prohibited from being a party to QFCs that would allow a QFC counterparty to exercise default rights against the covered FSI based on the entry into resolution proceeding under the FDI Act, or any other resolution proceeding of an affiliate of the covered FSI. Also amended under this rule is the definition of “qualified master netting agreement” in the FDIC’s capital and liquidity rules, and certain related terms in the FDIC’s capital rules to ensure that the regulatory capital and liquidity treatment of QFCs to which a covered FSI is a party would not be affected by the restrictions on such QFCs.

The rule is substantively identical to QFC rules finalized by the Federal Reserve and OCC that apply to institutions supervised by those agencies.  The final rule, finalized September 27, 2017, will take effect January 1, 2018.  For more information, click here to view the ABA Banking Journal article discussing the rule.

September 29, 2017 at 2:21 pm

CFPB Rule Blocks Class Action Bans in Arbitration Clauses

Written by: Jennifer Salisbury

Yesterday, the Consumer Financial Protection Bureau (CFPB) issued a final rule blocking certain financial institutions – including banks, credit card companies, student lenders, payday lenders, debt collectors, and credit reporting companies – from including class action bans in arbitration clauses. The rule does not take effect immediately, and applies only to contracts signed after March 2018.  Arbitration clauses are not banned altogether, but companies will be required to submit certain information about individual arbitration cases to the CFPB, which will be published on the CFPB’s website beginning in July 2019.  For more information, click here to view the Law360 article discussing the rule.

July 11, 2017 at 9:48 am

Is a Buyer of Defaulted Debt a “Debt Collector” for Purposes of the FDCPA?

Written by: Lisa Connolly

“Disruptive dinnertime calls, downright deceit and more…” On June 12, 2017, the U.S. Supreme Court issued a unanimous opinion in Henson vs. Santander Consumer USA, Inc., 582 U.S. _____ (2017), holding that a company who purchases debt and seeks to collect such debt for itself and not on behalf of a third-party creditor is not a “debt collector” subject to scrutiny under the Fair Debt Collection Practices Act (“FDCPA”).

The Key Issue.  The key issue in this case revolves around the FDCPA’s definition of the term “debt collector” and whether Santander Consumer USA, Inc. (“Santander”) satisfies the definition of “any person who regularly collects … debts owed or due…another”.  15 USC 1692(a)(6).  The FDCPA was enacted in order to address and protect consumers from abusive debt collection practices by debt collectors.  15 USC 1692(e).  In general, the FDCPA applies to consumer transactions in which a consumer is obligated to pay money arising out of a transaction for personal, family, or household purposes.  15 USC 1692(a)(5).

Whether a person or company falls under the scrutiny of the FDCPA depends on whether such person or company is a “debt collector”. Subject to certain exclusions, a person or company is a “debt collector” for purposes of the FDCPA if (i) the principal purpose of such person or company’s business is the collection of debts or the enforcement of security interests, (ii) such person or company regularly collects or attempts to collect debts owed to a third party, or (iii) in the collection of its own debts, such person or company uses a different name indicating that a third person is collecting or attempting to collect such debts.  15 USC 1692(a)(6).  Creditors who originate debt are typically excluded as a “debt collector” so long as they are collecting their own debts in their own name.  15 USC 1692(a)(6)(F).

Background.  As background, four consumer petitioners received secured automobile loans from a consumer finance company, Citi Financial Auto (“Citi”), and thereafter defaulted on the loans due to non-payment; this resulted in the foreclosure and repossession of petitioner’s vehicles and pursuit of deficiency balances owed to Citi.  Santander, a consumer finance company in the business of buying defaulted consumer debt, briefly serviced Citi’s defaulted loans during the time Citi held the loans, including petitioner’s loans.  Subsequently, Santander purchased a portfolio of defaulted automobile loans from Citi, including those of petitioner, and attempted to collect the debt it acquired on its own account.  Petitioners brought class action claims against Santander alleging that Santander violated the FDCPA.  The District Court and the Fourth Circuit rejected petitioner’s argument that the FDCPA applied to Santander, finding that Santander was not a “debt collector” under the FDCPA due to the fact that Santander did not regularly collect debts “owed…another”.

Analysis.  In bringing its claims, petitioners argued that Santander was necessarily a debt collector subject to the FDCPA because prior to Santander’s purchase of Citi’s defaulted loans, it serviced Citi’s defaulted loans; once Santander became the holder of such loans, Santander effectively sought to recover on a debt for a third party. Petitioners also pointed to the word “owed” under the FDCPA to suggest that the timing and type of the debt exposed debt purchasers to scrutiny for seeking to collect debts previously owed to third parties, but excluded from any scrutiny loan originators who maintain ongoing relationships with debtors and who never collect debt for third parties.

In addition to arguing semantics that would broadly define a “debt collector” to include a debt purchaser, petitioners also pitched a public policy argument pushing the idea that a broad interpretation of the statute would best uphold consumer protections and the intent of Congress in its enactment of the FDCPA. The Court rejected petitioner’s claims, agreeing with Santander: Santander became a creditor collecting its own loans once it purchased and began collecting upon such loans, and was thus excluded from FDCPA.

Narrow Ruling.  In the Court’s narrow ruling, the Court declined to consider two issues not previously raised by petitioners: (i) whether debt buyer that regularly collects debts on its own account and services third-party debt is a “debt collector” under the FDCPA, and (ii) whether there is a threshold of debt that a debt purchaser must own to be exempt under the “principal purpose” definition of a “debt collector” – those engaged “in any business the principal purpose of which is the collection of debts.” §1692a(6). These issues are likely to be further litigated, and may open the door for potential liability to debt buyers in the future.

Ultimately, the court’s ruling resolves a circuit split in favor of banks and finance companies that seek to collect upon the debt that they purchase.

Concluding Thoughts.  Heralded as a judge with judicial philosophy and style nearly identical to that of Justice Scalia, Justice Gorsuch’s appointment to the Supreme Court left many of us anticipating what mark he would make on a bench often dominated by the originalist views of Justice Antonin Scalia. In his first opinion, Justice Gorsuch proves he is a witty textualist who is not afraid to break the rules of grammar for dramatic effect, challenge canons of construction, and delve into linguistic analysis, all while remaining sensitive to policy concerns and, in the end, recognizing that in the context of the plain language of the statute such concerns “present many colorable arguments…a fact that suggests…these are matters for Congress, not this Court to resolve.”

June 19, 2017 at 9:12 am

Written by: Lindsay Harden

Yesterday the OCC issued Frequently Asked Questions (“FAQs”) to supplement OCC Bulletin 2013-29, “Third-Party Relationships: Risk Management Guidance.” The FAQs provide helpful guidance to banks on subjects including working with fintech companies, reducing oversight costs for lower-risk third-party relationships, and engaging in marketplace lending arrangements with non-bank entities. Portions of this guidance may be particularly useful for community banks who wish to leverage resources by distributing costs among multiple banks. For example, the OCC clarified in the FAQs that banks using a common third-party service provider may collaborate with each other to meet certain OCC expectations with respect to performing due diligence, contract negotiation, and ongoing monitoring responsibilities. The FAQs also make clear that a bank may outsource certain compliance management functions or collaborate with a group of banks to manage cybersecurity issues, as additional cost saving alternatives.

June 8, 2017 at 2:11 pm

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